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59 Facts & Figures On Marijuana Legalization

Takeaway: We hope that speakers like Dr. Kilmer can help lay the groundwork for an emerging investment thesis.

Editor's Note: This research note was originally sent to subscribers on April 28, 2014 at 10:01 a.m. EST by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Consumer Staples on Twitter @HedgeyeStaples.

 

59 Facts & Figures On Marijuana Legalization - m2

 

Last week we hosted a special call, Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, co-director of RAND Corporation’s Drug Policy Research Center, to kick off a series of speakers on the topic. 

 

Dr. Kilmer co-authored the book Marijuana Legalization: What Everyone Needs To Know. Below we’ve summarized the first half of the book in which the authors provide a number of facts and figures on marijuana legalization. With increasingly more Americans supporting marijuana legalization – in fact a slight majority (54%) based on a recent Pew Research survey – we believe the data and studies provided in the book (while some are rough estimates and contested) offer a starting point for sizing up marijuana and the potential road to its legalization in the United States.

 

59 Facts & Figures On Marijuana Legalization - Pew marijuana chart


Chapter 1: What is Marijuana?

  • The marijuana plant contains concentrated amounts of mind-altering chemicals known as cannabinoids.
     
  • Marijuana (or cannabis) is neither a stimulant nor a depressant.
  • THC (delta-9-tetrahydrocannabinol) is the main psychoactive ingredient in marijuana, and can vary based on the wide genetic diversity of marijuana.
     
  • When marijuana is consumed as a joint, less than half of the THC is inhaled and absorbed by the lungs (the rest is burned up by the smoke).
     
  • THC enters the bloodstream and begins to reach the brain within seconds.
     
  • Ingesting marijuana orally (e.g. eating marijuana brownies) is less efficient, with smaller fraction entering the user’s bloodstream.
     
  • Marijuana can be detected in a user’s system well after the high, therefore complicating testing in determining usage.

59 Facts & Figures On Marijuana Legalization - marijuana plant

 

Chapter 2: Who Uses Marijuana?

  • Globally, 125-200 million people use marijuana in the course of a year, or ~ 3-4% of the world’s population age 15-64, making cannabis by far the most widely used illicit substance.
     
  • The prevalence of marijuana use in the U.S. is about three times the global average.
     
  • In the U.S., 44% of 12th graders have tried the drug at least once, 6% are daily users.
     
  • Marijuana use is highest among 18-25 year olds, with first use around the same time of alcohol use, ~ age 16.
     
  • While marijuana did not achieve mass-market status in the U.S. until the mid-1960s, historically it is one of the oldest of the psychoactives.
     
  • Hemp cord dates back 10,000 years and the first recorded use of medical was in China around 2700 BC.
     
  • By the late 19th Century, marijuana was a common ingredient in many medicines and was widely available, however not consumed as an intoxicant until the early 1900s.
     
  • By 1931, 29 states had criminalized marijuana (such movies as Reefer Madness propagated strong anti-marijuana government propaganda).
     
  • Usage did not pick up until the 1960s. A 1967 Gallop poll of college students reported a 5% lifetime prevalence of use. In 1969 the same poll totaled 22%, and by 1971 51%.
     
  • President Nixon signed the Comprehensive Drug Abuse Prevention and Control Act of 1970, which along with the Controlled Substances Act (CSA), created a scheduling system that place psychoactive substance such as heroin, LSD, and marijuana as Schedule I drugs.
     
  • The Reagan administration in the 1980s increased anti-marijuana rhetoric with the “Just Say No” campaign and marijuana use dropped.
     
  • However in the 1990s usage bounced back, yet below the levels reached in 1979-80.
     
  • 40-50% of the people who have ever tried marijuana report a lifetime total of fewer than 12 day of use.
     
  • Regular users are in the minority, but they dominate market demand. 6 million Americans aged 12 and over use marijuana on a daily basis, according to National Survey on Drug Use and Health, in 2009.
     
  • There’s a clear trend since the 1960s of more potent marijuana offerings, and while marijuana use tended to be “upscale” demographically in the 1960s, the bulk of marijuana consumed today is smoked by people both poorer and less educated.
     
  • Estimates suggest the total market value of marijuana (medical and illicit) at $15 to $30 billion annually (versus estimates of $23 billion for corn and $17 billion for soybeans).

59 Facts & Figures On Marijuana Legalization - 630 marijuana joint

 

Chapter 3: How is Marijuana Produced and Distributed Today?

  • Today in the U.S. marijuana is mostly grown on a small scale, and can be grown outdoors or indoors, with or without soil; the cannabis plant is hardy.
     
  • Unlike cocaine and heroin, marijuana need not be extracted or refined; the dried plant material is the drug.
     
  • With reasonable confidence it is estimated that the majority of marijuana consumed in the U.S. is imported from Mexico (1/2 to 2/3rds); domestic production is the next largest source (1/5th to 2/5th), with smaller amounts imported from Canada, Jamaica, and a few other countries.
     
  • California dominates for outdoor plants (74% of the 9.8 million plants in 2009) and to a lesser extend indoor plants (41% of the 300,000 plants), followed by Washington (indoor and outdoor), Tennessee (outdoor), and Florida (indoor).[Note: we’d suspect that Colorado (indoor) growth may be entering this list if more current data was available].
     
  • Most marijuana entering the U.S. from Mexico is smuggled in by violent drug trafficking organizations.
     
  • The price of marijuana goes up markedly as it moves down the distribution chain from grower to user.
     
  • Commercial-grade marijuana produced in bulk in Mexico (4-6% THC) sells for about $35-$50/pound in Mexico and $200-500/pound just inside the U.S. border, increasing at a wholesale price of ~ $400/pound for every thousand miles away from the Mexican border, reaching $1,000 - $1,400/pound in the East and Northeast.
     
  • Marijuana is so expense primarily because production and distribution are illegal.

59 Facts & Figures On Marijuana Legalization - m1

 

Chapter 4: How Stringent Is Marijuana Enforcement in the U.S.?

  • In 2010 there were more that 1.6MM state and local arrests for drug violations.
     
  • Less than half of arrests were for marijuana offenses; 46% for possession and 6% for sale/manufacturing.
     
  • With an estimated 30MM Americans users of marijuana per year, only 2.5% of users got arrested.
     
  • Not all marijuana arrests lead to prosecution. Even if convicted, what happens depends on age, number of prior arrests, amount of marijuana possession, and the jurisdiction.
     
  • Alaska has the most lenient statutory sanctions for possession of small quantities: Possession of 1 ounce in private residence is not considered a criminal act and carries no penalty.
     
  • In California, Maine, Massachusetts, and Nebraska possession of up to one ounce is consider a civil infraction, or petty act, with no jail time, but fines may range from $100 to $600.
     
  • Reasonable estimates put total incarceration costs at $1.2B (about 40,000 inmates at $30k per year).
     
  • Seven states, referred to as the M7, account for about 90% of marijuana cultivated: California, Hawaii, Kentucky, Oregon, Tennessee, Washington, and West Virginia. 

59 Facts & Figures On Marijuana Legalization - large JNS.MarijuanaRaid3

 

Chapter 5: What Are The Risks Of Using Marijuana?

  • There is no clear evidence on what type of person is the most typical user.
     
  • Epidemiological study by James Anthony and colleagues found that 9% of those that had used marijuana wound up being clinically dependent on marijuana at some point in their lives, males are at a much greater risk than females. Comparable rate for alcohol = 15%; cocaine = 16%.
     
  • Heavy marijuana users can experience withdrawals, but physical discomfort generally pales in comparison to that experience by those with serious addictions to alcohol or heroin.
     
  • Robin Room and colleagues found that marijuana posed less addictive risk than tobacco, alcohol, cocaine, stimulants, or heroin.
     
  • In 2009 marijuana accounted for more than 350,000 drug treatment admissions in the U.S.
     
  • The Center for Disease Control’s WONDER database reports only 26 deaths between 1997 and 2007 due to the use of cannabinoids.
     
  • Marijuana smoke contains carcinogens.  What is not clear is whether exposure is great enough to cause cancer.
     
  • Marijuana users generally inhale more deeply than cigarette smokers, but consumer far less marijuana than regular cigarette smokers consume tobacco.
     
  • Kids who use marijuana, particularly those who start marijuana use at a young age, are statistically more likely to go on to use other drugs than their peers who do not use marijuana.
     
  • Being stoned impairs driving performance, but driving stoned isn’t as dangerous as driving drunk, however determining toxicity is a challenged because marijuana can stay in the system for a number of days.
     
  • The two major research projects that follow expectant mothers and their children after birth both found an association between prenatal marijuana exposure and poorer cognitive development, attention and executive functioning.

59 Facts & Figures On Marijuana Legalization - marijuana and alcohol

 

Chapter 6: What Is Known About The Nonmedical Benefits Of Using Marijuana?

  • Astoundingly little, claim the authors.
     
  • Serious scholarship in the U.S. is hamstrung by administrative rules. Only one facility is allowed to grow cannabis for use in research, and that supplier is only allowed to provide it to the government.
     
  • Scientists can’t get legal supplies of research material without applying for a grant from the National Institute on Drug Abuse; that agency has not proven especially responsive to requests from researchers interested in studying either the benefits or harms of marijuana.
     
  • So while heroin, cocaine, methamphetamine, or LSD are available to researchers, marijuana remains an exception.

59 Facts & Figures On Marijuana Legalization - marijuana leaf joint 140423

 

Chapter 7: What Are The Medicinal Benefits Of Using Marijuana?

  • It depends on who you ask.
     
  • U.S. Federal government unwaveringly argues that marijuana has no medicinal value, the states’ positions are mixed.
     
  • Polls conduction In 2010 by ABC News/Washington Post and Pew showed that 8 in 10 respondents supported medicinal marijuana.
     
  • Proponents point to marijuana as having therapeutic value in treating a range of symptoms; among the most common are appetite loss, nausea, chronic pain, anxiety, sleeping disorders, muscle spasms, and intraocular pressure.
     
  • The Federal government has placed marijuana in Schedule I, the category of substances with no accepted medicinal use.

We will not be making any investment recommendations on any marijuana stocks at this time, but we hope that speakers like Dr. Kilmer can help elucidate such topics as policy and legal frameworks, economics of marijuana, and social implications around marijuana legalization and help lay the groundwork for an emerging investment thesis.

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MGM Q1 2014 - EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

1Q14 CONSENSUS

  • EBITDA:  $582 million
  • Revenues: $2.566 billion
  • EPS: $0.08

QUESTIONS FOR MANAGEMENT

  • Outlook for LV REVPAR beyond Q1
  • Explain the under performance of slots over the past few years. Do you see a recovery in LV slot volumes for the rest of the year?
  • Will there be any slot machine upgrades to try to stem a secular decline from an aging demographic?
  • MGM China:  Any new initiatives on the VIP/Mass front at MGM Macau to drive same store growth beyond just overall market growth? Competitive environment?
  • Credit outlook for VIP players and thoughts on VIP future given China issues
  • What's the latest on Japan?  How much is the Company willing to invest for a Tokyo Integrated Resort?  What sort of partnership arrangements would MGM consider?
  • Thoughts on potential new owner of Cosmopolitan.  Would you be interested?
  • Quantitative performance of co-marketing deals with regional operators.
  • What is the next step in Springfield and when does the company expect to break ground?
  • Update on New Jersey Re-licensing and what is the next event?  When does MGM expect to receive the $100+ million cash distribution from the Trust?  What is the use of proceeds?
  • Does MGM Resorts International (MGM) or MGM China (2282) have any intent at repurchasing shares in 2282?

 

RECENT MANAGEMENT COMMENTARY

REVPAR/bookings:

  • 1Q REVPAR expected to be up ~10% YoY
  • Feel good about the remainder of the year.
  • Most of the REVPAR growth will come from rate.
  • Still feel comfortable with the pace of bookings in the remaining three quarters of the year. And there's still some more work to do, say, in the fourth quarter in and around the holiday period. Overall, feel very confident in ability to meet or exceed the prior-year levels.

Slot business:

  • Slot business here in Las Vegas is actually up when the market has been actually down.
  • Overall slot numbers are down because of the regional properties

Strip development:

  • Strip frontage at New York-New York and Monte Carlo will be completed in the first half of this year.  New park will be completed in 2016.  Remodel of THEhotel into the Delano will begin in April and expected to be completed by September.

MGM Cotai:

  • Increased project cost from $2.6 b to $2.9b
    • There has been some market increases, so there has been escalation in labor and some materials as well.
  • Will open in early 2016

MGM National Harbor:

  • Groundbreak in the summer and opening in 2016

Springfield:

  • Remain very excited about the opportunity for a downtown revitalization project in Springfield.  Await a decision and awarding of that license this year.

Convention market:

  • Strong convention market in Las Vegas in 2014 with improving corporate business.
  • Expect 1Q convention mix to be ~22%, near peak levels for any 1Q prior
  • FY 2014:  expect convention mix to increase to 15.5-16%, which is beginning to approach prior peak levels.
  • The quality of the convention mix is continuing to improve with industries and corporates coming back into the fold, not only is it a better customer this year, but will pick up higher banquet spending, catering spending and restaurant, food and beverage spending throughout.
  • Room attrition's coming in lower now
  • Convention pace for 2015, 2016, 2017, all look above where they were prior year for the previous years.

Strip flowthrough:

  • Flow through was a bit better than expectations due to strong collection efforts which have been consistent throughout the year, continued refinements to our M life program, and a change to the employee vacation policy and accrual.  As a result, Strip flow through was approximately 70% in 4Q, above 50% to 60% target.

Operating costs:

  • It'll be relatively in check in 2014.

Crystals:

  • Added a few more tenants and look forward to bring on a few more in current calendar year

Mandarin Oriental:

  •  In 2014, sales are up to a strong start with 18 units closed in January alone.

Receivables:

  • Pretty good shape in terms of overall receivables and reserves against that receivable.  Don't expect a creep up.

Use of MGM China dividend:

  • Will use in this interim period to pay down debt and anticipate to do that throughout 2014.  More reinvestment opporunities in 2015/2016.
  • MGM China semiannual dividend policy of 35% of profit

Luxury vs Core

  • Luxury properties continue to see a pretty good customer and continue to hope to see them improve their spending.
  • Core properties, when that convention base isn't there, they continue to be challenged on consumer spend.  But when it is in here, they're able to get a higher quality customer in their hotel. The correlation between the ADR and spend is definitely there.

Borgata trust

  • Would look to sometime here in the first half be back and front of the New Jersey Casino Commission and the DGE on that opportunity.
  • Trust balance: $102m

2014 non-operating guidance:

  • Capex at wholly owned domestic resorts:  $350m
  • JV LV arena: $75m on MGM's share of investment
  • National Harbor: $170m on development costs
  • MGM Macau: $70m
  • MGM Cotai: $500m

Bill Gross Is Way Late Getting Bullish on US Growth

Takeaway: What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point.

Editor’s note: This is an excerpt from CEO Keith McCullough’s Morning Newsletter today. Incidentally, this is the third time Hedgeye has made a big directional call that #InflationAccelerating will slow US consumption growth—the other two being in Q1 of 2008 and Q1 of 2011.

Bill Gross Is Way Late Getting Bullish on US Growth - bg

 

…Meanwhile everyone and their brother from the #OldWall in NYC to Washington and now California (PIMCO calling for “high 2% US Growth”) continue to confuse nominal growth (inflation) with real (inflation adjusted) growth.

 

On Wednesday the US will release GDP for the 1st quarter, and it will likely:

  1. Have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413)
  2. See the Deflator (yes, you have to subtract it from nominal GDP) continue to rise from its sequential Q213 low

Bill Gross Is Way Late Getting Bullish on US Growth - Chart of the Day

 

In other words, on the 2 core factors that matter in our GIP (Growth, inflation, Policy) model:

  1. INFLATION = will be accelerating
  2. GROWTH = will be slowing

More commonly called stagflation, the common man’s wallet gets squeezed when this starts to happen. That’s not my opinion, that’s US economic history in the post Greenspan era (Bernanke and Yellen).

 

… What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point. With the biotech and #SocialBubble stocks (FB, TWTR, YELP, etc.) getting pounded again on Friday (Nasdaq down -0.5% on the wk to -2.4% YTD), Utilities (XLU) closed the week up another +1.9%!

 

Sure, if you’re long Gold (up +0.5% last week to +8.1% YTD), Bonds, or any stock that looks like a bond, you’re having a great year. As you should be.

 

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investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Monday Mashup: Adding ZOES, BOBE to the Watch List

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: Adding ZOES, BOBE to the Watch List - invest

 

DNKN We’re pulling DNKN from the Watch List as a potential long after the company delivered disappointing 1Q14 results.  We like Dunkin’s asset-light business model, but its exposure to the Northeast concerned us and, ultimately, stopped us from recommending it as a long.  Looking ahead, DNKN faces increasingly difficult comps for the next two quarters, which makes us cautious on the name.  

 

BOBE – We’re adding Bob Evans to our Watch List as a potential long.  Activist Sandell Asset Management has identified significant opportunities for value creation at the company and has presented a compelling case to shakeup the board and spark change.  If the proposed actions are implemented, Sandell values the company at approximately $90/share.  We believe the stock could be worth more than that.

 

ZOES – We’re adding Zoe’s Kitchen to our Watch List as a potential long.  Zoe’s is a unique concept that we believe is well positioned for growth in the fast casual industry as its aggressive expansion and same-store sales momentum persists.

 

Look for more to come on these two new names in the coming weeks.

Recent Notes

04/21/14  Monday Mashup: CMG, WEN and More

04/22/14  MCD: Staying on the Sidelines

04/23/14  DRI: The Hour Between Dog and Wolf

04/23/14  YUM: China Leads the Way

04/24/14  CAKE: Still Short

Earnings Call This Week

04/28/14  RUTH earnings call 4:30pm EST

04/28/14  DENN earnings call 4:30pm EST

04/28/14  BWLD earnings call 5:00pm EST

04/29/14  DFRG earnings call 8:30am EST

04/29/14  NDLS earnings call 4:30pm EST

04/29/14  BBRG earnings call 5:00pm EST

04/30/14  PNRA earnings call 8:30am EST

04/30/14  IRG earnings call 5:00pm EST

04/30/14  KONA earnings call 5:00pm EST

05/01/14  DPZ earnings call 10:00am EST

05/01/14  DIN earnings call 11:00am EST

05/01/14  BJRI earnings call 5:00pm EST

05/01/14  BAGL earnings call 5:00pm EST

Chart Of The Day

Putting the coffee surge in perspective – prices are now up 75.7% YTD.

 

Monday Mashup: Adding ZOES, BOBE to the Watch List - chart2

Recent News Flow

Monday, April 21

  • FRGI Taco Cabana opened its first Cabana Grill restaurant in Snellville, GA as Fiesta Restaurant Group continues its east-west expansion for all of its fast casual brands.
  • MCD The WSJ published an article that shows franchisees were largely critical of management’s efforts to protect market share in the breakfast daypart by offering free coffee amid increased competition.

Tuesday, April 22

  • DRI Starboard Value LP announced it secured enough votes to call a Special Meeting with the intention of stopping the proposed Red Lobster spinoff.  Starboard Managing Member, Chief Executive Officer and Chief Investing Officer, Jeffrey C. Smith, publicly criticized Clarence Otis, saying the Darden Chairman and CEO is in a hot seat.  Darden will have 60 days to call the meeting.
  • BJRI came to an agreement with PW Partners and Luxor Capital, agreeing to nominate three new independent directors at the 2014 Shareholder Meeting.  Mark McEachen has been appointed to the board, effective immediately, while Patrick Walsh and Noah Elbogen will be up for election at the Annual Meeting.  BJ’s also implemented a $50mm buyback program.
  • FRGI upgraded to strong buy at Raymond James with a $48 PT.
  • RUTH upgraded to outperform at Raymond James with a $13.50 PT.
  • DFRG downgraded to market perform at Raymond James.

Wednesday, April 23

  • CBRL Preliminary results reveal that shareholders “overwhelmingly reject” both non-binding proposals put forth by Biglari Capital Corp.  This is now the fourth time shareholders have shot down Sardar Biglari’s activist efforts.

Thursday, April 24

  • DNKN announced a second quarter cash dividend of $0.23 per share, payable on June 4, 2014.
  • SONC promoted James O’Reilly from Chief Marketing Officer to Chief Brand Officer and Todd Smith from VP of Marketing to Chief Marketing Officer.
  • BOBE acknowledged the receipt of notice of nominations put forth by activist Sandell Asset Management and largely rejected Sandell’s recommended steps to increase shareholder value.

U.S. Macro Consumption

The XLY (-0.5%) underperformed the SPX (-0.1%%) last week, as both casual dining and quick service stocks, in aggregate, underperformed the broader XLY benchmark.  The Hedgeye U.S. Consumption Model continues to be a bearish signal, currently flashing red on 7 out of 12 metrics.  We continue to believe the current environment is more conducive to select fast casual and quick service restaurants than casual dining restaurants.

 

Monday Mashup: Adding ZOES, BOBE to the Watch List - chart3

XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.

 

Monday Mashup: Adding ZOES, BOBE to the Watch List - 4

Casual Dining Restaurants

Monday Mashup: Adding ZOES, BOBE to the Watch List - 5

 

Monday Mashup: Adding ZOES, BOBE to the Watch List - 6

Quick Service Restaurants

Monday Mashup: Adding ZOES, BOBE to the Watch List - 7

 

Monday Mashup: Adding ZOES, BOBE to the Watch List - 8

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


MACAU: SLOWER WEEK

We’re now projecting full month YoY GGR growth of +7-9% for April, slower than our original projection of +14%, probably due in part to low hold %.  This past week's daily table revenues averaged HK$904 million, only 2% above the comp from last year.

 

Seemingly becoming a trend, SJM is once again gaining share as we approach the end of the month.  Share of 25.2% is above the company’s recent trend.  MPEL is the only other company meaningfully above trend.  Galaxy improved its share this past week but April has not been kind to that company’s properties.  LVS is also now tracking below its 3 month moving average.

 

We still expect a nice rebound in May revenues in Macau which could approach +20% YoY growth.

 

MACAU: SLOWER WEEK - macau22

 

MACAU: SLOWER WEEK - macau23


Marijuana Legalization: Facts & Figures

Last week we hosted a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, to kick off a series of speakers on the topic. 

 

Dr. Kilmer co-authored the book Marijuana Legalization: What Everyone Needs To Know. Below we’ve summarized the first half of the book in which the authors provide a number of facts & figures on marijuana legalization. With increasingly more Americans supporting marijuana legalization, in fact a slight majority (54%) based on a recent Pew Research survey, we believe the data and studies provided in the book (while some are rough estimates and contested) offer a starting point for sizing up marijuana and the potential road to its legalization in the U.S.

 

Marijuana Legalization: Facts & Figures - Pew marijuana chart

 


Chapter 1: What is Marijuana?

  • The marijuana plant contains concentrated amounts of mind-altering chemicals known as cannabinoids.
  • Marijuana (or cannabis) is neither a stimulant nor a depressant.
  • THC (delta-9-tetrahydrocannabinol) is the main psychoactive ingredient in marijuana, and can vary based on the wide genetic diversity of marijuana.
  • When marijuana is consumed as a joint, less than half of the THC is inhaled and absorbed by the lungs (the rest is burned up by the smoke).
  • THC enters the bloodstream and begins to reach the brain within seconds.
  • Ingesting marijuana orally (e.g. eating marijuana brownies) is less efficient, with smaller fraction entering the user’s bloodstream.
  • Marijuana can be detected in a user’s system well after the high, therefore complicating testing in determining usage.

Chapter 2: Who Uses Marijuana?

  • Globally, 125-200 million people use marijuana in the course of a year, or ~ 3-4% of the world’s population age 15-64, making cannabis by far the most widely used illicit substance.
  • The prevalence of marijuana use in the U.S. is about three times the global average.
  • In the U.S., 44% of 12th graders have tried the drug at least once, 6% are daily users.
  • Marijuana use is highest among 18-25 year olds, with first use around the same time of alcohol use, ~ age 16.
  • While marijuana did not achieve mass-market status in the U.S. until the mid-1960s, historically it is one of the oldest of the psychoactives
  • Hemp cord dates back 10,000 years and the first recorded use of medical was in China around 2700 BC.
  • By the late 19th Century, marijuana was a common ingredient in many medicines and was widely available, however not consumed as an intoxicant until the early 1900s.
  • By 1931, 29 states had criminalized marijuana (such movies as Reefer Madness propagated strong anti-marijuana government propaganda).
  • Usage did not pick up until the 1960s. A 1967 Gallop poll of college students reported a 5% lifetime prevalence of use. In 1969 the same poll totaled 22%, and by 1971 51%.
  • President Nixon signed the Comprehensive Drug Abuse Prevention and Control Act of 1970, which along with the Controlled Substances Act (CSA), created a scheduling system that place psychoactive substance such as heroin, LSD, and marijuana as Schedule I drugs.
  • The Reagan administration in the 1980s increased anti-marijuana rhetoric with the “Just Say No” campaign and marijuana use dropped.
  • However in the 1990s usage bounced back, yet below the levels reached in 1979-80.
  • 40-50% of the people who have ever tried marijuana report a lifetime total of fewer than 12 day of use.
  • Regular users are in the minority, but they dominate market demand. 6 million Americans aged 12 and over use marijuana on a daily basis, according to National Survey on Drug Use and Health, in 2009.
  • There’s a clear trend since the 1960s of more potent marijuana offerings, and while marijuana use tended to be “upscale” demographically in the 1960s, the bulk of marijuana consumed today is smoked by people both poorer and less educated.
  • Estimates suggest the total market value of marijuana (medical and illicit) at $15 to $30 billion annually (versus estimates of $23 billion for corn and $17 billion for soybeans)

Chapter 3: How is Marijuana Produced and Distributed Today?

  • Today in the U.S. marijuana is mostly grown on a small scale, and can be grown outdoors or indoors, with or without soil; the cannabis plant is hardy.
  • Unlike cocaine and heroin, marijuana need not be extracted or refined; the dried plant material is the drug.
  • With reasonable confidence it is estimated that the majority of marijuana consumed in the U.S. is imported from Mexico (1/2 to 2/3rds); domestic production is the next largest source (1/5th to 2/5th), with smaller amounts imported from Canada, Jamaica, and a few other countries.
  • California dominates for outdoor plants (74% of the 9.8 million plants in 2009) and to a lesser extend indoor plants (41% of the 300,000 plants), followed by Washington (indoor and outdoor), Tennessee (outdoor), and Florida (indoor).[Note: we’d suspect that Colorado (indoor) growth may be entering this list if more current data was available].
  • Most marijuana entering the U.S. from Mexico is smuggled in by violent drug trafficking organizations.
  • The price of marijuana goes up markedly as it moves down the distribution chain from grower to user.
  • Commercial-grade marijuana produced in bulk in Mexico (4-6% THC) sells for about $35-$50/pound in Mexico and $200-500/pound just inside the U.S. border, increasing at a wholesale price of ~ $400/pound for every thousand miles away from the Mexican border, reaching $1,000 - $1,400/pound in the East and Northeast.
  • Marijuana is so expense primarily because production and distribution are illegal.

Chapter 4: How Stringent Is Marijuana Enforcement in the U.S.?

  • In 2010 there were more that 1.6MM state and local arrests for drug violations
  • > half of arrests were for marijuana offenses; 46% for possession and 6% for sale/manufacturing.
  • With an estimated 30MM Americans users of marijuana per year, only 2.5% of users got arrested.
  • Not all marijuana arrests lead to prosecution. Even if convicted, what happens depends on age, number of prior arrests, amount of marijuana possession, and the jurisdiction.
  • Alaska has the most lenient statutory sanctions for possession of small quantities: Possession of 1 ounce in private residence is not considered a criminal act and carries no penalty.
  • In California, Maine, Massachusetts, and Nebraska possession of up to one ounce is consider a civil infraction, or petty act, with no jail time, but fines may range from $100 to $600.
  • Reasonable estimates put total incarceration costs at $1.2B (about 40,000 inmates at $30k per year).
  • Seven states, referred to as the M7, account for about 90% of marijuana cultivated: California, Hawaii, Kentucky, Oregon, Tennessee, Washington, and West Virginia.

Chapter 5: What Are The Risks Of Using Marijuana?

  • There is no clear evidence on what type of person is the most typical user.
  • Epidemiological study by James Anthony and colleagues found that 9% of those that had used marijuana wound up being clinically dependent on marijuana at some point in their lives, males are at a much greater risk than females. Comparable rate for alcohol = 15%; cocaine = 16%.
  • Heavy marijuana users can experience withdrawals, but physical discomfort generally pales in comparison to that experience by those with serious addictions to alcohol or heroin.
  • Robin Room and colleagues found that marijuana posed less addictive risk than tobacco, alcohol, cocaine, stimulants, or heroin.
  • In 2009 marijuana accounted for more than 350,000 drug treatment admissions in the U.S.
  • The Center for Disease Control’s WONDER database reports only 26 deaths between 1997 and 2007 due to the use of cannabinoids.
  • Marijuana smoke contains carcinogens.  What is not clear is whether exposure is great enough to cause cancer.
  • Marijuana users generally inhale more deeply than cigarette smokers, but consumer far less marijuana than regular cigarette smokers consume tobacco.
  • Kids who use marijuana, particularly those who start marijuana use at a young age, are statistically more likely to go on to use other drugs than their peers who do not use marijuana.
  • Being stoned impairs driving performance, but driving stoned isn’t as dangerous as driving drunk, however determining toxicity is a challenged because marijuana can stay in the system for a number of days.
  • The two major research projects that follow expectant mothers and their children after birth both found an association between prenatal marijuana exposure and poorer cognitive development, attention and executive functioning.

Chapter 6: What Is Known About The Nonmedical Benefits Of Using Marijuana?

  • Astoundingly little, claim the authors.
  • Serious scholarship in the U.S. is hamstrung by administrative rules. Only one facility is allowed to grow cannabis for use in research, and that supplier is only allowed to provide it to the government.
  • Scientists can’t get legal supplies of research material without applying for a grant from the National Institute on Drug Abuse; that agency has not proven especially responsive to requests from researchers interested in studying either the benefits or harms of marijuana.
  • So while heroin, cocaine, methamphetamine, or LSD are available to researchers, marijuana remains an exception.

Chapter 7: What Are The Medicinal Benefits Of Using Marijuana?

  • It depends on who you ask.
  • U.S. Federal government unwaveringly argues that marijuana has no medicinal value, the states’ positions are mixed.
  • Polls conduction In 2010 by ABC News/Washington Post and Pew showed that 8 in 10 respondents supported medicinal marijuana.
  • Proponents point to marijuana as having therapeutic value in treating a range of symptoms; among the most common are appetite loss, nausea, chronic pain, anxiety, sleeping disorders, muscle spasms, and intraocular pressure.
  • The Federal government has placed marijuana in Schedule I, the category of substances with no accepted medicinal use.

We will not be making any investment recommendations on any marijuana stocks at this time, but we hope that speakers like Dr. Kilmer can help elucidate such topics as policy and legal frameworks, economics of marijuana, and social implications around marijuana legalization and help lay the groundwork for an emerging investment thesis.  We hope you can join us for future calls.

 

Matt Hedrick

Associate


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